Peru Keeps 4.25% Rate as Inflation Returns to Target Range

  • Central bank extends holds rate unchanged for sixth month
  • Inflation is back in target sooner than policy makers forecast

Peru’s central bank kept borrowing costs unchanged after inflation eased back to its target range sooner than expected amid sluggish domestic demand.

The central bank board, led by bank President Julio Velarde, held the key rate at 4.25 percent Thursday for a sixth consecutive month, matching the forecast of all 15 economists surveyed by Bloomberg.

“The bank remains vigilant of projected inflation and its determinants in order to consider adjustments to the benchmark rate,” the board said in a statement accompanying its decision. Inflation will remain close to the top of the target band in the coming months before falling to 2 percent at the end of next year, it added.

Peru’s annual inflation rate fell to a 17-month low in July after the sol rebounded and the central bank raised borrowing costs four times in the past year to tame inflation expectations. Though domestic demand remains weak, a jump in business sentiment following presidential elections last month suggests private investment will recover in the coming months, said Roberto Flores, chief strategist at Inteligo SAB.

Optimism

Companies’ optimism about the economy is at the highest level in more than three years, boosting their expectations for hiring, according to the central bank’s monthly survey. President Pedro Pablo Kuczynski has pledged to reduce delays to large infrastructure projects and roll out a $15 billion program to boost water and sanitation coverage.

Lending to corporations was weaker than expected in the first half of this year, but may pick up toward year-end and a recovery in consumer lending will follow, Credicorp Ltd. Chief Operating Officer Walter Bayly told analysts Tuesday. Credicorp is the country’s biggest financial services company.

Inflation eased to 2.96 percent last month from 3.34 percent in June. The central bank targets inflation in a range of 1 percent to 3 percent, with Inteligo’s Flores forecasting that it would remain near the upper limit of that range in the next 12-18 months.

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